How the AARP Made $2.8 Billion By Supporting Obamacare's Cuts to Medicare

United States Senator Jim DeMint at a rally for United States Senate candidate Rand Paul in Erlanger, Kentucky. (Photo credit: Wikipedia)

As you know if you’ve been reading this blog, Obamacare cuts $716 billion from Medicare in order to pay for its $1.9 trillion expansion of coverage to low-income Americans. It’s one of the reasons why seniors are more opposed to the new health law than any other age group. So why is it that the group that purports to speak for seniors, the American Association of Retired Persons, so strongly supports a law that most seniors oppose? According to an explosive new report from Sen. Jim DeMint (R., S.C.), it’s because those very same Medicare cuts will give the AARP a windfall of $1 billion in insurance profits, and preserve another $1.8 billion that AARP already generates from its business interests.

(DISCLOSURE: I am an outside adviser to the Romney campaign on health-care issues. The opinions contained herein are mine alone, and do not necessarily correspond to those of the campaign.)

Here’s how it works. AARP isn’t your every-day citizens’ advocacy group. The AARP is also one of the largest private health insurers in America. In 2011, the AARP generated $458 million in royalty fees from so-called “Medigap” plans, nearly twice the $266 million the lobby receives in membership dues.

Medigap plans are private insurance plans that seniors buy to cover the things that traditional, government-run Medicare doesn’t, like catastrophic coverage. Medigap plans also help seniors eliminate the co-pays and deductibles that are designed to restrain wasteful Medicare spending.

AARP blocked Medigap reforms, saving the group $1.8 billion

Adding catastrophic coverage to Medicare, while restraining the ability of Medigap plans to waste money, is a key to Medicare reform, one that has been a big part of bipartisan plans in the past. According to the Kaiser Family Foundation, the Medigap reforms that AARP blocked would have saved the average senior as much as $415 in premiums per year.

But the AARP aggressively, and successfully, lobbied to keep Medigap reforms out of Obamacare, because AARP receives a 4.95 percent royalty on every dollar that seniors spend on its Medigap plans. Reform, DeMint estimates, would have cost AARP $1.8 billion over ten years.

Cuts to Medicare Advantage could earn AARP over $1 billion

Not only did AARP succeed in getting Democrats to balk at Medigap reform. Obamacare’s cuts to Medicare Advantage will drive many seniors out of that program, and into traditional government-run Medicare, which will increase the number of people who need Medigap insurance.

That means more royalty profits for the AARP. Reps. Wally Herger (R., Calif.) and Dave Reichert (R., Wash.) estimated that the change “could result in a windfall for AARP that exceeds over $1 billion during the next ten years.”

AARP Medigap plans exempted from Obamacare’s insurance mandates

It gets worse. AARP Medigap plans are exempted from most of Obamacare’s best-known insurance mandates. AARP Medigap plans are exempted from the ban that requires insurers to take all comers, regardless of pre-existing conditions. The plans are exempted from the $500,000 cap on insurance industry executive compensation; top AARP executives currently make more than $1 million. AARP plans are exempt from the premium tax levied on other private insurers. IPAB, Medicare’s rationing board, is explicitly barred from altering Medicare’s cost-sharing provisions, provisions that govern the existence of Medigap plans.

And AARP Medigap plans are allowed to have twice the administrative costs that other private insurers are allowed under Obamacare’s medical loss ratio regulations. This last point is key, because AARP’s 4.95 percent royalty is a significant administrative cost.

Democrats routinely excoriate private insurers for supposedly putting profits above people. "No American should ever spend their golden years at the mercy of insurance companies," President Obama told the AARP yesterday. But the typical private insurer gets by on a profit margin of about 5 to 6 percent. AARP’s 4.95 percent royalty, on the other hand, doesn't do anything to make a health plan operate more smoothly: it's just pure profit for AARP.

Publicly, the AARP poses as an independent, non-partisan organization. But privately, the organization strongly favored Obamacare. “We will try to keep a little space between us,” one senior AARP executive told the White House in November 2009, according to records unearthed by DeMint. “[Our] polling shows we are more influential when we are seen as independent, so we want to reinforce that positioning…The larger issue is how best to serve the cause” of Obamacare.

Kim Strassel at the Wall Street Journal goes through 71 pages of emails uncovered by the House Energy and Commerce Committee, which "show an AARP leadership...that from the start worked to pass Obamacare, before crucial details pertaining to seniors had been addressed." AARP had "long lambasted cuts in fees to Medicare doctors," she notes, but the lobby reversed itself for Obamacare, claiming that Obamacare's provider cuts were just fine.

AARP has a multibillion-dollar 'conflict of interest'

This week, the AARP hosted a convention in New Orleans, at which President Obama and Paul Ryan spoke about Obamacare and Medicare. When Rep. Ryan spoke to the AARP about the importance of repealing Obamacare, he was booed. Small wonder, given the AARP’s extreme financial interest in the law. According to DeMint, during the Obamacare debate in Congress, the AARP’s phone logs from seniors registered more than 50 to 1 against the law.

Remember these issues the next time someone points out that the AARP supports Obamacare’s Medicare cuts, and opposes the Romney-Ryan plan. The Romney-Ryan plan would dramatically reduce the need for Medigap plans, because it would encourage the formation of comprehensive insurance plans within the Medicare program itself.

Obamacare, on the other hand, saved the AARP from $1.8 billion in Medigap reforms, while potentially earning the group an additional $1 billion in royalties from seniors who are forced out of Medicare Advantage. That’s a swing of $2.8 billion over ten years, all thanks to Obamacare.

"There's an inherent conflict of interest," says Marylin Moon, who served as director of AARP's Public Policy Institute from 1986 to 1989. "A lot of people there are trying to do good, but they're ending up becoming very dependent on [Medigap royalty] sources of income."

It’s a testament to AARP's political power—and our broken health-care system—that the lobby is allowed to carry on a half-billion-a-year business that’s based on increasing the premiums that seniors pay, and draining money from the taxpayers who get billed for wasteful Medicare spending. Sen. DeMint has done a public service by bringing these problems out into the open.

UPDATE 1: In its 2014 annual financial statement, AARP reported receiving $297 million in dues, and approximately $528 million in Medigap royalties from UnitedHealth.

UPDATE 2: In the Fall 2012 issue of National Affairs, Daniel Kessler of Stanford does a nice job of explaining AARP's strong financial incentives to oppose premium support-style Medicare reform:

To be sure, health-care providers are not the only parties with an interest in preserving Medicare as we know it. Special-interest groups, too, are deeply invested, and thus highly engaged in the politics of entitlement reform. One powerful advocacy group in particular — the AARP — merits special attention. The motives behind its fierce opposition to the Wyden-Ryan premium-support proposal illustrate further advantages to moving from administrative to competitive pricing in Medicare.

It is not immediately obvious why the AARP — formerly known as the American Association of Retired Persons — should so strenuously oppose a reform that would not affect current seniors or anyone now over 55. Nor is it clear why the group would agitate against a proposal that could save the Medicare program from future collapse while retaining a guaranteed and comprehensive insurance benefit for seniors — both today and in the future. The group may well judge the IPAB's administrative-pricing model to be superior, but such a policy preference seems unlikely to account for the intensity of the AARP's opposition to premium support.

A look at what the AARP actually is and does helps to solve the mystery. As the country's largest non-profit advocacy group, the AARP has always been an important player in Washington. In recent years, however, its size and funding sources have changed. In 1990, the AARP had gross receipts of $300 million (which would be about $525 million in 2009 dollars); by 2009, gross receipts had grown to $2.2 billion. This makes the organization eight times as large as the second-largest non-profit advocacy group, the National Rifle Association. In 1990, AARP membership dues were one-third of gross receipts, but by 2009, they had fallen to one-ninth.

Where is the rest of the money coming from? The key to answering this question lies in understanding Medicare supplemental insurance: private policies that pay for services not covered by Medicare, or that cover the program's co-payments and deductibles. These policies have an adverse effect on Medicare's finances, because they effectively eliminate cost-sharing as a motivator to keep health-care consumption in check. After all, if seniors have supplemental insurance, they basically have free health care — which means they pay no price for seeking more and more care. Several studies have shown that this leads to significantly greater spending, and only marginal medical benefit. Indeed, one recent study conducted for MedPAC showed that, all else being equal, supplemental coverage led to 33% more spending, largely in the form of elective outpatient procedures (as opposed to emergency or other urgent, non-discretionary inpatient services).

Supplemental insurance is thus harmful to Medicare's finances. But it's great for the AARP. Why? Choosing among the different supplemental plans — sorting through their various benefits and coverage differences, and weighing those against prices — can be a daunting task for seniors. The AARP steps in by lending its name to commercial insurers for the sale of AARP-approved and -branded Medicare supplemental, Medicare Advantage, and Medicare prescription-drug policies. AARP earns enormous royalties from these sources; indeed, they now account for about half of the group's income.

It is therefore not surprising that the AARP is deeply committed to — and in fact dependent upon — preserving this state of affairs. Hence the ferocity of the group's opposition to premium support. In a system like the one proposed by Wyden-Ryan, seniors would select coverage from among plans that all have the same required minimum benefits; as a result, there would be much less uncertainty about what one plan or another would or would not cover. This, in turn, would reduce seniors' reliance upon AARP endorsements or branding to select plans. And from the insurers' perspective, being forced to compete for seniors' business — by offering a good product at the lowest possible price — would give them every incentive to eliminate unnecessary costs. Immense royalty payments to the AARP in order to borrow the group's name would surely be among the first expenses to go. Moreover, any serious premium-support insurance plan would probably eliminate traditional Medicare's unlimited cost-sharing — thereby undermining the political and economic rationales for Medicare supplemental policies in the first place.

This would be a disaster for the AARP, but a boon to the cause of making Medicare more efficient (and thus more sustainable). Given that countless other powerful advocacy groups have similar stakes in keeping Medicare as it is, the story of the AARP is yet another example of how premium support would keep politics out of the system, and thereby help keep spending under control.